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New MSA Status For Nebraska Counties May Impact Stark Physician Relationships

on Tuesday, 30 April 2013 in Health Law Alert: Erin E. Busch, Editor

The U.S. Office of Management and Budget recently announced new Metropolitan Statistical Areas (“MSAs”) based upon 2010 census data. In that announcement, a new MSA was created that includes Grand Island and the counties of Hall, Hamilton, Merrick and Howard. MSAs, by definition, have at least one urbanized area of 50,000 or more in population plus adjacent territory that has a high level of socio- economic integration. The new designation not only recognizes the growth of Grand Island and surrounding communities, but will have considerable impact on certain financial arrangements between hospitals (regardless of location) and physician-owned entities in the areas included in the new MSA.


There are no Stark compensation exceptions based upon rural location. However, the “rural provider” exception permits physician ownership in (and thus physician referrals to) rural non-hospital entities. In order to qualify for the rural provider exception, substantially all of the designated health services furnished by the entity must be furnished to individuals who reside in a “rural area.” The regulations define “substantially all” as being not less than 75% of the designated health services the entity furnishes.


The key to qualifying for the “rural provider” exception is the definition of “rural area.” Under Stark, a “rural area” is any area that is not in an MSA. For purposes of the rural provider exception, designated health services provided to patients residing within an MSA are not considered to be services provided to residents of rural areas. Thus, these services will not count toward satisfying the 75% threshold.


It is important to recognize that qualification for the rural provider exception is not based upon the location of the physician-owned entity, but the location where the entity provides substantially all of its services. That is, just because a physician-owned entity is located within the new MSA does not per se mean that the entity no longer qualifies as a rural provider. Nonetheless, it is highly likely that physician-owned entities based in an MSA will fall into the rural provider definition unless they provide most of their services outside of the community. Thus, a physician-owned entity located in the new Grand Island MSA that previously relied upon the “rural provider” exception to protect referrals of designated health services by its physician owners may no longer be available and may have to be restructured.


The new Grand Island MSA also has the potential to significantly impact hospitals1 that do business with physician-owned entities that are based in the new MSA. In 2009, CMS revised the Stark regulations in a manner that prohibited most “under arrangement” relationships with physicians.2 Subsequent to that change, the only realistic way a hospital could continue to enter into an “under arrangement” financial relationship with a physician-owned entity was if that physician-owned entity qualified as a rural provider under the rural provider exception. It was through the rural provider exception that physicians could continue to make referrals to their own entity providing the under arrangement service. If the entity failed to qualify as a rural provider, the arrangement would result in a Stark violation to the extent a physician-owner continued to refer patients to his or her entity.


In the preamble to the Phase III Stark rules, CMS indicates that it will not grandfather arrangements based upon prior MSA status. That is, if an entity qualified for rural provider status when it was created and an MSA designation changed, the entity would not continue to qualify as a rural provider. In CMS’s opinion, “a physician who invests in an entity furnishing DHS in a rural area takes a risk that the area will subsequently be classified as an urban area.” Thus, if a physician- owned entity no longer qualifies for rural provider status based upon a new MSA designation, any under arrangement contracts with that physician-owned entity must be unwound to the extent the physician owners will continue to make referrals to the entity.


As a result of the new Grand Island MSA, we suggest that hospitals review their relationships with physician-owned entities located in the applicable counties to determine whether or not any of those relationships constitute “under arrangement” agreements. If any such arrangement exists, it will need to be determined whether the physician-owned entity continues to qualify as a rural provider based upon the locations in which it provides substantially all of its services. If, after review, it is determined that the entity no longer satisfies the rural provider exception, the arrangement will need to be promptly unwound.


Andrew D. Kloeckner

1. This includes hospitals that are outside of the new MSA.

2. Under arrangement relationships are relationships where an entity essentially provides the entire service to the hospital, including the technical staff and equipment.

Read the Full Newsletter: Health Law Advisory April 30, 2013

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